I have no prior or existing relationships with any person, group or company mentioned in this article, except that I own shares in Colonial Coal, (TSX-v: CAD) / (OTC: CCARF) a steelmaking (coking coal) company with two projects in B.C. Canada. The projects have PEAs on them and host a combined 695 million tonnes (mt) of resources (not reserves)

Both projects have been for sale via an investment bank-led process since 2019. Management maintains that COVID-19 has been a major contributor to the slowness in finding a buyer.

However, some investors question the desirability of the assets in terms of various things such as coal quality, ability to get the projects permitted (environmental & First Nation approval) and put into production in a reasonable timeframe.

Other concerns include availability of third-party rail, power & ports, geopolitical challenges (can China realistically bid for Canadian assets?) , why did management stop at the PEA level?

Why are there no established reserves, just resources? Why would anyone pay $2+/mt when several historical transactions done at the top of the last cycle ended poorly for the acquirers?

A big risk factor in my assessment of Colonial is that I trust CEO David Austin at his word. If he’s mistaken then all bets are off. However, in a bear case scenario — a fire sale of the two assets — I think shareholders are well more than covered at the current valuation.

With that in mind, please continue reading — 10 reasons to care about coking coal, and especially Colonial Coal. 

#1 — Mining & burning coking coal is a necessary evil. There are few if any substitutes that can be rapidly deployed on a large-scale basis at reasonable cost. Despite decades of trying to reduce the amount of coking coal required in steelmaking, and transitioning to more production in electric-arc furnaces, centuries-old blast furnace technology still accounts for ~70% of the global market..

Thermal (energy) coal is on its way to being phased out — albeit over many more years — easily replaced by nuclear, wind, solar & hydroelectric sources.

Although its use is bad for the environment, existing technology to scrub emissions at the steel plant level is available. Moreover, emissions from the seaborne transport of coking coal will be falling from the upcoming electrification of containerships. Finally, carbon credit trading is expanding into the trillions of dollars, enabling steelmakers to become more green.

#2 — Colonial’s valuation is quite attractive. Its share price performance (% gain from 52-wk low) is in the top 15% among 62 peers I’m tracking, but the stock is down > 50% from its 52-week high (bottom 10% of peers). Investors have been waiting years for the Company’s two projects to be sold, investor fatigue has set in.

On an Enterprise Value {market cap + debt – cash} to resource tonnes in the ground basis, Colonial is valued at just $0.355/mt. This compares to a number of historical M&A deals done at $2+/mt. Most historical transactions were done over a decade ago.

Since then, inflation has picked up AND coking coal prices are much higher than they were during most of the previous peak in 2010-11. These two factors support a robust EV/mt valuation, perhaps up to $3/mt if a bidding war ensues. In the following chart of coking coal futures in China, the US$ eq. price is ~$479/mt. Prices peaked in the low-to-mid $300's/mt in 2010-2011. 

Commentators on CEO.ca {a tremendous Canadian stock market dashboard & online community} actively debate the takeover price, saying it should be $2-$3+/mt, but even @ $1/mt, that would be a 179% premium over the current price. At $1.5/mt it would be a 317% gain, and @ $2/mt a 456% gain.

At $1/mt, I think there would be several committed bidders, if only to keep the assets out of the hands of competitors. For instance, Teck Resources, Anglo American & Glencore should care at $1/mt as they have projects & operating mines surrounding Colonial’s and the purchase price of $695 milion would be small relative to their enterprise values.

#3 — Dozens of financially strong private & publicly-owned companies — mostly giant steel or coal companies from the U.S., India, China, Brazil, Canada, Korea, Japan & Australia — with valuations well into the $10’s of billions, can comfortably afford to acquire Colonial’s assets and develop them into decades-long cash flow machines.

Importantly, steel companies are under far less pressure to reduce their use of coking coal as the world needs steel to decarbonize. Moreover, state-owned/controlled companies desperately need security of supply. Giant Indian & Chinese conglomerates are not overly concerned about ESG mandates.

#4 — Strong management team, board & advisors. Every company says it has a truly great team, most have average or good teams. Readers can make up their own minds on Colonial’s exec. strength by reading the bios below. Not only do senior execs & advisors have industry & jurisdictional expertise, they also have direct experience in coking coal M&A in western Canada.

CEO/Chairman David Austin sold both Western Coal & NEMI at the top of the market in 2010. Conditions today are as strong or stronger for the sale of Colonial’s projects. Compared to 2010-11, both coking coal & inflation are higher. Mr. Austin said in a May conference call that there are currently more prospective bidders at the table (about a dozen signed, active NDAs) than ever before.

#5 — NOT A CRYPTOCURRENCY. Last I checked, Colonial is not a cryptocurrency!!

#6 — As a special situation stock, (ongoing investment bank-led sales process underway) it should exhibit relatively low correlation to the overall stock market & stock market sectors.

#7 — Coking coal is a tangible, hard asset. Real assets like industrial commodities are inflation-friendly. Metals & Mining companies perform well in inflationary environments, and also in periods when value investing is favored over growth. 

#8 — Unlike already producing companies, Colonial is NOT saddled with; debt, legacy liabilities, elevated pension/healthcare obligations, ultra-high reclamation costs, etc. An acquirer of Colonial’s assets should be able to avoid — or at least better manage — the coal-sepecific challenges that existing producers are stuck with. 

#9 — Location, location, location. Colonial’s two projects are surrounded by coking coal operations or projects owned by Teck & Anglo. Glencore is also active in the Peace River Coalfield (PRC) of B.C. Canada. 

There’s ample regional infrastructure [power, water, rail, roads, west coast ports]. An acquirer of Colonial’s assets will be able to partner with other developers to further develop regional infrastructure needs.

#10 — Colonial’s two projects totaling 695 million mt of resources (not reserves) is large in size. The coal quality in the PRC is well understood by most potential buyers, especially Americans, Canadians, Japanese & Koreans. PRC coking coal has been shipped to Asia for over half a century.

In working with a few Chinese groups, CFO Andrea Yuan encouraged them to run tests that showed Colonial’s coal as better than previously thought, as good as any PRC coal available in the market.

RISK FACTORS — Coal is a dirty word. Viable coking coal substitutes like green hydrogen could be fast-tracked to become widely available in say 10-15 years vs. 20-30 years. Trading liquidity is poor. Perceived permitting/environmental hurdles & ongoing geopolitical/COVID-19 challenges could premept bids from a meaningful subset of prospective buyers. CEO Austin could be overly optimistic on the prospects of selling Colonial's projects at a premium valuation. It could take many months between the announcement of one or more bid(s) and the ultimate sale of one or both assets. The stock could be halted for weeks/months at a time while bid(s) come in. Coking coal price could fall below back to $150-$200/mt for an extended period.